The Economics of Green Power Offered to Electricity Consumers

Abstract

Green Power schemes offer electricity generated by recently constructed renewable energy sources to customers for a higher price than ordinary electricity. This study examines the place of Green Power in the electricity supply industry and among policies to counter global warming, the demand and supply characteristics of Green Power, its effectiveness and measures which could increase its sales. Although growing rapidly, Green Power sales are less than 0.5% of total electricity sales in Australia. The wide variation in market penetration between jurisdictions and between countries for Green Power, the discrepancies between stated willingness-to-pay surveys and actual sales and the low awareness of Green Power found by surveys indicate that Green Power sales could be increased by appropriate marketing and government policies. A sample of 250 pooled time series and cross sectional observations was used to estimate a statistically significant elasticity of demand for residential customers for Green Power with respect to price of -0.96. Green Power schemes appear not to be necessarily loss-making activities for retailers. There has been ample generating capacity for Green Power to meet the growing sales to customers to date. The most cost effective means to increase sales was found to be advertising campaigns such as the campaign in Victoria in 2005. It was also found that full tax deductibility of the Green Power premium to residential customers, an exemption of the Green Power premium from the Goods and Services Tax and a tax rebate for Green Power are probably less cost-effective for promoting sales than direct government purchase of Green Power in terms of cost of policy per unit of increased sales. Green Power plays a small but important role as one amongst a number of climate change policies and the potential of this role is yet to be fully realised.